What to Do if Your Manager is Committing Fraud: Part 2 of 8

Part 2: Illegal Revenue Schemes

Beyond financial statement manipulation, some managers operate active criminal schemes that generate, hide, or divert revenue illegally. These schemes often intersect with the company's books and require accounting staff to either participate or look the other way.

2.1 Skimming

Skimming is the theft of cash or revenue before it is recorded in the accounting system. Because it never enters the books, it's among the hardest schemes to detect. Signs include:

•       Cash sales that are not reflected in daily deposits or point-of-sale records.

•       Customer complaints about not receiving receipts or credits for payments made.

•       Bank deposits that are consistently lower than expected based on sales volume.

•       An employee (often a manager) who insists on personally handling cash reconciliations without oversight.

2.2 Fictitious Vendor Schemes (Billing Fraud)

A manager creates a fake vendor or hijacks payments to a legitimate vendor, then diverts the funds:

•       A vendor whose address matches a personal residence or P.O. Box.

•       Vendor names that are similar to legitimate suppliers but with subtle differences ("Staples Office Supply" vs. "Staple Office Supply").

•       Invoices with no corresponding purchase order, contract, or deliverable.

•       Payments to vendors who provide no verifiable product or service.

•       A single employee who both initiates purchase orders and approves payments — a segregation of duties violation.

2.3 Payroll Fraud

Payroll is a rich target for fraudulent schemes:

•       Ghost employees: payroll checks issued to individuals who don't work at the company, or who no longer do.

•       Inflated hours or commissions approved by a manager for themselves or a co-conspirator.

•       Unauthorized pay rate changes that appear in the payroll system without HR or ownership approval.

•       Payroll taxes that are withheld from employee checks but never remitted to the IRS or state authorities.

2.4 Cash Larceny

Unlike skimming, cash larceny occurs after cash has been recorded — the manager steals it after it enters the books. This is easier to detect because it creates a paper trail, but it still occurs frequently. Look for deposits in transit that never clear, petty cash funds that are consistently short, or bank reconciliations that don't reconcile without unexplained adjustments.

2.5 Expense Reimbursement Fraud

Fraudulent expense reports are a common and often underestimated scheme:

•       Personal expenses submitted for reimbursement as business costs.

•       Inflated receipts — submitting a receipt for a higher amount than was actually spent.

•       Duplicate submissions: the same expense submitted multiple times across different reporting periods.

•       Fabricated receipts with no corresponding transaction in the vendor's records.

2.6 Tax Evasion and Off-Book Transactions

In some cases, fraud extends beyond the company's internal books to the company's relationship with tax authorities:

•       Revenue collected in cash that is not reported to the IRS.

•       Personal expenses run through the company to generate fraudulent deductions.

•       Employees misclassified as independent contractors to avoid payroll tax obligations.

•       Falsified cost-of-goods-sold figures to reduce taxable income.

•       Sales tax collected from customers but never remitted to the state.

Know Your Exposure

If you are asked to prepare, sign, or file financial documents — tax returns, loan applications, financial statements — that you know to be fraudulent, you may have personal legal liability even if you were acting under orders. "I was told to" is not a complete defense. This is one of the most critical reasons to act, and to act carefully.

Have Questions? MMB MBA Can Help.

At MMB MBA, we specialize in forensic bookkeeping, QuickBooks consulting, and helping businesses untangle financial irregularities. If you suspect fraud in your organization — or if you're a business owner who suspects something is wrong — we can conduct a discreet, professional review of your books and help you understand what you're looking at.

Contact us today at www.mmbmba.com

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